Carnival Earnings: Cost Pressures Continue to Weigh on Shares, but Profits at a Turning Point

Although no-moat Carnival CCL delivered second-quarter results that were ahead of both company and our expectations and lifted its full year outlook, a slower-than-expected reduction in expenses sent shares tumbling more than 10%. We surmise concern surrounds an increase in advertising spending, which could imply consumers need motivation to book. In contrast, we see higher incentive compensation (retaining talent) and a slower decline in inflation as cost inputs that are largely out of management’s control. Net cruise costs excluding fuel jumped 12%, much faster than the 8%-9% guide and our 8% estimate. With the full-year cost minus fuel set to rise 8%-9% (up from 6.5%-7.5% prior), the march to full-year profitability remains elusive in 2023. This overshadowed reported second-quarter net per diems that rose 5%, handily outpacing company guidance of 0%-1% and the 1% we had forecast preprint.

We think the market is judging Carnival on its relative performance to peers rather than the progress that has been made and its long-term opportunity set, which are the supporting factors underlying our $22 (GBX 1,760) fair value estimate, a number we don’t plan to alter materially. Carnival remains at a turning point, with the third quarter set to generate the firm’s first positive earnings mark since 2019. And while third-quarter EPS will likely run at 25% of the same period in 2019′s level, most of the compression stems from higher interest expense rather than operating inefficiencies. Indeed, Carnival could post third-quarter EBITDA at 85% of 2019′s level, marking a significant step toward normalized profit growth.

EBITDA levels should continue to rise, as the metric is a focus of the firm’s newly launched SEA Change plan, which seeks a 50% lift in adjusted EBITDA per available lower berth day, or ALBD, by 2026 compared with 2023. If achieved, Carnival could deliver around $6.5-$7 billion in EBITDA in 2026, in line with the $6.6 billion we modeled preprint.